Friday, April 25, 2014

The trouble with historical tax bracket comparisons

It seems like an absurdly small amount of people understand how marginal tax brackets work. The basic idea is that one's income is placed into multiple tax brackets, and different sections of that income are taxed at different rates.

What too many people mistakenly believe is that an American taxpayers puts their entire income into one bracket, and their entire income is taxed at that rate. That idea is flat-out wrong, and there are a lot of political arguments that depend on that misconception.

One of the most common ones is to lament or cheer that the top marginal tax rate in 1963 was 91 percent. Yes, it was, but so what? There were also 26 different brackets to get through first. The top bracket only kicked in after $400,000 for a married couple or $300,000 for a single person.

Adjusted for inflation, that's above $3.1 million for a married couple, or above $2.3 million for a single person. That's pretty much automatic earnings at that point, and very different from the 2013 tax bracket, where the 7th and final bracket kicks in at $450,000 or $400,000 to get a rate of 39.6 percent. There is no way to compare them in a way that is not arbitrary.

It is completely nonsensical to try to summarize how much the rich pay in taxes in a given year by dragging up the top marginal tax rate. I hear it from the left, and I hear it from the right, and it's wrong every time. The top rate tells us very little to the point of being nearly useless.

It doesn't even tell us what the rich paid in taxes.

Reject all political arguments that use the top rate as a shorthand way of identifying what people paid in taxes at that time.